:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/6A7ATU3G6VGIHNCTRV6NXBV65A.jpg "Roberto Campos Neto, president of the Central Bank of Brazil, speaks during a press conference in Brasilia.")
Bloomberg — Brazil’s central bank is expected to raise its key interest rate by 100 basis points and indicate whether that hike marks the end to one of the world’s most aggressive monetary tightening cycles since the pandemic.
All economists in a Bloomberg survey forecast policy makers will lift the benchmark Selic to 12.75% on Wednesday, 10.75 percentage points above the level it stood in March, 2021, when the monetary tightening cycle started. There’s less certainty about the message they will send regarding subsequent rate decisions.
:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/ZAJCHJ6EI5C7ZBBAYIQCE42VDU.png "Brazil analysts see more rate hikes this year with cuts at a slower pace next")
The bank, led by Roberto Campos Neto, is battling persistent energy and food shocks that have kept inflation above 10% for at least seven consecutive months. Price increases have been widespread across most products and services, and public servant protests for higher wages in the run-up to the October presidential election may fan additional cost pressures. Meanwhile, economic growth is unlikely to top 1% this year and next as high interest rates crimp demand.
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What Bloomberg Economics Say:
“The Brazilian central bank announced in March that it anticipated a cycle-ending rate hike at the May meeting, and official communication since then has mostly reinforced that message. We expect the BCB to stick to its plan and deliver a 100-basis-point rate increase on Wednesday, but the chances of a course shift have risen. Whether this will be the final hike of the cycle, as the central bank has signaled, is less clear.” -- Adriana Dupita, Brazil economist
Wednesday’s decision will be published on the bank’s website after 6:30 p.m. local time in Brasilia together with a statement from its board, which now has all nine members after Diogo Abry Guillen and Renato Dias de Brito Gomes were confirmed as new directors.
These are the points to look out for:
June Decision
Investors will scour the bank statement for guidance on the next rate-setting meeting in June. They expect policy makers to either leave the door open to another possible hike without giving specific details, or state plans for a smaller increase next month, likely meaning a final lift of 50 basis points.
Such a message would mark a shift for the central bank, which had previously signaled plans to end its tightening cycle this week. Economists are betting that a series of higher-than-forecast inflation data will force a change.
:quality(75)/cloudfront-us-east-1.images.arcpublishing.com/bloomberglinea/YF5HTUVXORC7LHIINJMCICGN4Q.png "Consumer prices in Brazil are surging further above target")
“There’s the ideal plan, and then there’s reality,” said Andre Loes, economist for Latin America at Morgan Stanley. “Inflation data, especially April’s numbers, seem quite concerning in terms of the breakdown. Price increases are really broad-based.”
Campos Neto said he was surprised by March’s inflation, which topped all forecasts in a Bloomberg survey of analysts. In mid-April, consumer prices soared past 12% a year, their fastest pace since 2003.
Inflation Scenarios
Complicating matters further, inflation expectations have deteriorated, and the real (USDBRL) has given up part of its year-to-date gains. That will leave investors even more focused on the central bank’s outlook for consumer prices, especially if policy makers leave the door open for more tightening.
Analysts now see prices rising 7.89% this year and 4.10% in 2023, above the respective targets of 3.5% and 3.25% for those years.
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At their last monetary meeting in March, central bankers introduced an alternative outlook in which oil prices were forecast at $100 a barrel by year’s end. Though Russia’s invasion of Ukraine continues, volatility in commodity price has eased somewhat, possibly allowing it to work with only one reference scenario again.
“Their communication was always difficult to be understood” by the market, said Felipe Sichel, an economist and partner at local investment bank Modal Asset Management Ltda, who researches the communication strategy of the Brazilian central bank. “It’s just getting more complicated now.”
Global Outlook
Financial markets also expect policymakers to comment on international challenges facing emerging markets, from interest rate hikes by the U.S. Federal Reserve to the consequences of Russia’s war on Ukraine. They could also reference the spike in Covid-19 cases in China and their impact on global supply chains.
